During crises, economic diversity is key

Posted by Matthew Anschau

When looking at the Australian economy as a whole, we tend to think of it as a diversified market, providing many opportunities for those wanting to do business within our borders. Australia is considered to be the world’s 14th largest economy, boasting AAA ratings from international rating agencies. The economy is deemed to be very robust and low risk, with technology and financial services at the heart of Australia’s economic growth. Nevertheless, there are limitations to looking at the Australian economy as a whole. Instead, it should be assessed just as we assess the national property market — made up of many different submarkets. Some offer conditions of diversity and lower volatility. Others don’t.

Over more recent years, lack of economic diversity (or overdependence on few industries) in Australia has been largely associated with regional mining areas. One such suburb is Collie, in south-west WA. Over the past decade, REA figures indicate Collie’s median house price has fallen from a high of $261,250 to the present figure of $152,000. Collie’s housing downturn accompanied the negative financial performance of nearby mines, themselves allegedly impacted by a change in government policy on renewable energy. From a working population of 4,710 people in Collie, 1,098 report employment in mining. As a result, the future of Collie doesn’t look much better than the present.

Griffin coal mine has been haemorrhaging $6 million dollars per month under the shadow of a “step in rights contract review” by the Supreme Court. Image source: ABC News.

Another macroeconomic factor that influences some local markets differently to others is the performance of the Australian Dollar (AUD). Notably, a weakened AUD tends to benefit our tourism industry twofold: not only are overseas tourists attracted to our shores by greater value for money, but domestic tourists are dissuaded from overseas travel for the opposite reason. Higher levels of activity in tourist centres then boost economic and employment activity, which creates greater demand for services. Although other factors are undoubtedly at play, a correlation between property performance and the AUD can be observed in various tourist centres such as Cairns, where performance has been positive since the AUD’s downturn in 2011. Since this time, data from Tourism Australia indicates the number of International Visitor Nights in Cairns increased by almost 25 percent over 7 years, and Domestic Visitor Nights by 21 percent.

Over the past decade, the Australian Dollar trended downward against the US Dollar. Both domestic and international tourism in places such as Cairns grew substantially over this time. Data sources: Blue Wealth Property, Macrotrends.net, Economy.id

Diverse economies are easiest found in our large capitals. In contrast to Collie’s top two industries representing 40 percent of the workforce, the top two industries for Parramatta (in Sydney’s west) represent just 25 percent of the workforce. In recent years Parramatta has risen in prominence as Sydney’s second CBD, now employing approximately 50,000 people. If a certain industry in a suburb such as Parramatta experienced a downturn, property performance wouldn’t go unharmed, but it would be harmed a lot less in proportion than if the same were to happen in Collie or Cairns.

During moments like the current COVID-19 crisis, the importance of investing in diverse economies becomes more front of mind. As the crisis and its wake unfold, we will undoubtedly find some markets impacted more heavily than others. In particular, markets that are excessively dependent on leisure and the movement of people will face challenges, whereas others that are home to public servants or healthcare workers are expected to perform stronger. In the middle exist many diverse markets, which will vary in performance but will likely experience less volatility.

Posted by Matthew Anschau, on 21st Apr 2020